Crash Crash Crash !!!

Capital markets without losses is like religion without hell

Ouch !!! It hurt us bad, I mean , all of us.

There were an unprecedented abundance of ambulances on the road. ICUs were filled with patients complaining chest pain, and ECGs were running all around.Few people were arrested on charges of attempted suicide, trying to jump from a building. And to nobody's surprise, the building housed offices of several brokers. Telephone networks faced congestion...

Now Now Now, I don't know if any of it is true. These are all rumors I heard throughout the day, as our markets slipped, and kept on slipping. This was the first time I saw everyone in office (I mean everyone) clicking ferociously, again and again, just to check the current status. Still, I got a sense of deja vu, and realised this kind of maniac clicking happens everytime India plays cricket, where everyone wants to know the score.

I could sense the gloom spreading around. Nothing seemed right. Lunch tasted worse. Coffee wasn't hot enough. Presentations and demos went bad, and people left early.

Even the unceremonious ousting of Ganguly (and Dravid) from ODI squad touring Australia wasn't discussed, and take my word on this, you have to be in Calcutta for a while to understand the importance of it.

So, how the hell did this happen?

It all started with the outbreak of subprime mortgage crisis in US.
As US economy has been on an upswing for several years in a row, banks were giving large sums as loans to risky consumers (Lower credit score), charging them higher interest rates. The consumers paid the EMIs in a booming ecomomy, banks got richer by higher rates they charged on loans, and everything was hunky dory.
But as consumer sentiment lowered, with other troubles like unemployment and inflation surfacing, recession started to set in. The risky consumers now began defaulting on their loans, and banks got the authority to sell off the client's assets. But there was a simultaneous recession in US housing market as well, and so property valuations plummeted. This made balance sheets of most US Financial giants go RED. Deep RED, in fact. (Remember the fourth-quarte Citigroup Loss of $9.83 billion !!!)

But how the hell does this affect the whole world ???

There are two reasons:

1. The US Consumer has driven the global economy for quite some time now. But with the dollar falling, so much excess liquidity in the markets, it was only a matter of time before US consumer went bust.

2. The Banks in US traded the securities against loans throughout the world. These loans included the ones which are now the core of the US subprime crisis. Hence, the ramifications around the globe.



George Bush's plan for "direct and rapid relief " for the battered U.S. consumer arrived after the bloodbath in US markets; the price tag = US $ 150-billion through tax cuts. It has been greeted with a large dose of skepticism. Why this kind of a bailout in a free market economy? After all, borrowers weren't forced at gunpoint to take out loans they couldn't afford and lenders weren't obliged to lend to borrowers they knew couldn't afford it. It was greed all along, and now theey are paying the price. In that case, why should investors, future homeowners and potentially taxpayers pay for this sheer unadulterated greed on both sides, through higher costs and interest rates? And anyway, after this much shit, do they expect the US consumer will spend all the extra money from lower taxes on buying stuff rather than saving it???

BACK TO INDIA
Mayhem broke in India as it did everywhere else. But another problem is lurking behind the scenes as this storm takes it's toll.

A free fall in shares wiped off the combined market cap, of all the companies listed on the Bombay Stock Exchange (BSE), to the tune of a staggering Rs 6.7 lakh crore on Monday. While the Sensex has nosedived over 3,000 points in the past week, the consistent fall has seen an erosion of nearly Rs 12 lakh crore in Mcap to Rs 59.4 lakh crore during the period. It had taken almost three months to generate this amount of wealth in the market.

FLASHBACK
In July 2006, the National Stock Exchange had issued a circular to brokers asking them to submit an auditor’s certificate on the ownership of the shares pledged by them with the exchange. The policy was essentially to ensure that brokers do not misuse the funds of their clients.

BACK TO THE FUTURE
As markets plunged on Monday, brokers panicked and started pledging shares of their clients with the exchanges, in order to meet their own margin requirements. Now, this is in violation of NSE norms, which state that a broker cannot pledge share of his client with the exchange, without the client’s consent.The standard procedure states that Investors have to deposit margin money with their brokers before placing an order to buy or sell shares. The amount of margin to be paid depends on the value of the transaction. The investor can fund the margin requirement through a combination of cash, bank guarantee and shares. It is up to the broker as what percentage of the margin funds he would be comfortable accepting in the form of shares.The fall in the last two sessions has been particularly severe, and there are fears that quite a few clients may default on their commitments to the brokers. This in turn, could spell for the trouble for the broker as he/she has to make the pay-in to the exchanges even before he encashes his clients cheque. Now as these brokers default on their commitments, these shares will be liquidated by the exchange. But these are client's shares, brokers can't do this; its illegal.

So, when this dust settles, there will be another crisis to sort out. SEBI has its hands full, especially after athe whole P-Note saga in past few months. Everyone knows this is short term, and we'll be back on track within 3 - 4 months.


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With this blog I have completed my half century. Yeah, 50 posts.

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